Looming introduction of an energy auction system to Kenya

published on 13th February 2020

Kenya has been considering setting up an energy auction system for some time. Eng. Benjamin Mwakina The Director of Renewable Energy at the Energy and Petroleum Regulatory Authority (EPRA) was in 2019 quoted in the local press as saying that the EPRA was in the process of setting up the mechanisms that would enable the establishment of an energy auction system in Kenya.

The transition is part of the recommendations contained in the Updated Least Cost Power Development Plan for the study period 2017 – 2037 (“Plan”). The Plan is a ‘Kenya Energy Sector Report’ prepared under the coordination of the Energy and Petroleum Regulatory Authority (EPRA), with policy guidance from the Ministry of Energy and Petroleum (MOEP) and the support of other stakeholders such as Kenya Electricity Generating Company PLC and the Kenya Electricity Transmission Company.

The Plan recommends that the energy auction should be set up for the solar and wind energy markets, while that biomass and small-hydros would remain under the Feed-in Tariff system that is currently in use.

Kenya has been operating a Feed-in-Tariff (FiT) system for energy sourced from renewable energy sources since 2008 when it introduced the Feed-in-Tariffs Policy for Wind, Biomass, Small Hydros, Geothermal, Biogas and Solar (FiT Policy). The Fit Policy was codified into statute through its addition into the Energy Act, 2019 (the Act) however its provisions are still in force pending the development of regulations under the Act.

Under the FiT Policy, Independent Power Producers (IPP) are provided with set tariffs for the power they produce throughout the agreed upon life of the project. For example, grid connected solar projects should receive a tariff of 0.12 USD/kWh and wind 0.11 USD/kWh.

The tariffs in the FiT Policy were last revised in 2012. Since then there has been rapid development especially in solar technology which has greatly driven down the costs of generating electricity from these sources.

The tariffs in the FiT Policy and the tariffs in the already signed PPAs, have however not changed to reflect this development. The costs of these now relatively expensive tariffs are passed on to households and businesses.

An auction system will help with price discovery, enabling Kenya Power (Kenya’s grid operator) to procure electricity at the lowest possible price.

Around the world auctions have helped bring down prices of solar generated electricity to record lows time and again. The Philippines for instance, in a recent auction for a 50MW solar project received a bid for $0.04 per kwh. Zambia has also been able to achieve similar tariffs. In 2019, Zambia awarded six 20MW projects under its GET-FiT programme, where the lowest bid it received was $0.039 per kwh.

Kenya Power is not blind to this drop in tariffs and has been negotiating with prospective IPPs on accepting tariffs lower than those set out in the FiT Policy.

Kenya Power enjoys a strong bargaining position given the high level of interest it has received from IPPs. According to the EPRA, as at 2018 it had received more than 130 applications for total additional capacity of 4,500MW. Considering the fact that there is already an oversupply of capacity, IPPs have no option but to accept or reject the tariffs Kenya Power negotiates. Kenya Power and other stakeholders in government such as the Ministry of Energy also have no option but to demand lower tariffs in the face of the public criticism leveled against them over Kenya’s high cost of electricity.

EPRA and MOEP are yet to release any concrete information on how the auction system will operate. We expect however that they will do so in the course of the year 2020 along with other regulations and policies it needs to deliver in order to operationalize the Energy Act, 2019.

It is our view that the change to the auction system is inevitable. While it may appear to be a negative development from the perspective of IPPs as they stand to earn lower tariffs from the auction system, it is certain to open the market for new and efficient players as we expect that pending applications made under the FiT system would be dropped once the auction system is introduced. Big players in the renewable energy space are known to have been pushing for the introduction of the auction system. This is partly because they have access to cheaper capital and can therefore still be profitable in a low margin market.

There are likely to be more casualties in the commercial and industrial sector. If Kenya is able to get tariffs as low as $0.04, then the availability of lower cost electricity from the grid may negate the justifications for commercial and industrial players to purchase and install their own private generation systems. However we expect that at that time, the price of the technology could have dropped even further, allowing C&I players to offer competitive renewable energy products and solutions to their customers. Products or solutions with a discount on grid electricity pricing structure will most likely continue to remain attractive to customers in such a market despite their receiving lower profit margins.